Australian Dollar Outlook 26/7/2010

Australia: The Australia Dollar has opened up in the mid 0.8900's after another modestly strong showing from US and European equity markets on Friday.

Better than expected earnings results for Q2 in the US continued on Friday before the complete results of the stress tests on European banks were released on the weekend.

Q2 earnings in the US continued to be above expectations and a better than expected fall in US existing house prices of only 5.1% compared to the forecast of 9.9% helped push the Dow up 1% to 10,425, the S&P up 0.8% to finish above the crucial technical level of 1,100 to 1,102 and the NASDAQ rose 1.1% to 2,269.

In Australia, PPI (producer price index) for Q2 will released today with expectations of a rise of 0.8% as compared to last quarter's results of 1%.

Later this week the CPI for Q2 will be known and if higher than forecast of 0.9% this might justify the RBA raising the cash rate at their monthly meeting next week.

We expect the AUD to remain firm prior to the results of the CPI data, which may push it higher to 0.9000 if the figure is above expectations.

Majors: In Europe, of the 91 financial institutions stress tested only 7 banks failed the capital ratio test (capital to total assets) had to exceed 6% which was intended to test their ability to withstand a modest double dip recession.

Many have argued the tests were not severe enough but of the 7 banks that failed (5 in Spain and one each in Germany and Greece), they need only to raise EUR3.5b in new capital compared to the EUR30b that some expected.

The combination of the bank stress test and a stronger than expected UK Q2 GDP compared to the 0.6% expected raised the GBP and EUR levels against the USD at 1.5400 and 1.2900, respectively.